Ford Agrees to Sell Volvo to a Fast-Rising Chinese Company

HONG KONG — Ford Motor reached an agreement on Sunday to sell its Volvo subsidiary to a Chinese conglomerate, in the clearest confirmation yet of China’s global ambitions in the auto industry.

The Zhejiang Geely Holding Group, based in Hangzhou, agreed to pay $1.8 billion for Volvo, with $1.6 billion in cash and the rest in a note payable to Ford.

Ford paid $6 billion in 1999 to acquire Volvo, leaving the company with a substantial loss on its investment. Ford has shifted its strategy to focus on its core brands and has already sold off other luxury brands, including Jaguar and Land Rover to the Tata Group of India for $2.3 billion a year ago.

The purchase of one of Europe’s most storied brands shows how China has emerged not just as the largest auto market by number of vehicles sold in the last year, but also as a country determined to capture market share around the globe.

Zhejiang Geely said it planned to retain production of Volvo cars in Sweden, but it is expected to build another factory for them in China, most likely near Beijing or Shanghai. Ford already builds small numbers of Volvos for the Chinese market at an assembly plant in Chongqing. Most of the vehicles built at that factory are Fords and Mazdas for sale in China.

China overtook the United States in 2009 as the world’s largest auto market in terms of the number of family vehicles sold. But the average car in China sold for $17,000 last year while the average price tag in the United States was close to $30,000, according to the consulting firm J. D. Power & Associates. So the American car market is still bigger by value than China’s.

Zhejiang Geely’s majority-owned automotive subsidiary, Geely Automobile Holdings, is China’s 12th-largest automaker based on production so far this year. But it is China’s second-largest automaker, after the BYD Group, that is not at least partly state-owned.

Michael Dunne, an independent auto analyst based in Bangkok, said that acquiring a well-known brand was the fastest way for a company like Geely Auto to move up from making affordable cars for the masses to building respected cars for the affluent.

“This is all about Geely’s efforts to bust out of the basement,” Mr. Dunne said. “Volvo happens to be available.”

Many automakers in China are loaded with ambition, but Geely Auto stands out even by Chinese standards. While making most of its money on inexpensive compacts and subcompacts, it has turned heads at auto shows with ambitious concept cars that look like Western sports cars and even Rolls-Royces.

Last fall, Ford said that Geely was the preferred bidder for Volvo, but there were a number of problems that needed to be overcome, including ones involving trade secrets, financing and the initial hostility of Swedish labor and political leaders. In late December, the two had settled on most of the details of a deal, but financing and government approvals remained to be completed.

The parent company has said repeatedly that it planned to keep Volvo as a separate unit from Geely Auto. The company promised again on Sunday to retain Volvo’s existing management, but according to people in the industry, the company had already hired several executives with international automotive experience to help it oversee the new subsidiary.

Zhejiang Geely is dominated by its founder, Li Shufu, the son of farmers from Taizhou, in southeastern China, who turned a small business building motorcycle parts there into one of China’s fastest-growing companies.

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“I want to emphasize that Volvo is Volvo and Geely is Geely — Volvo will be run by Volvo management,” Mr. Li said on Sunday at a news conference in Goteborg, Sweden. “We are determined to preserve the distinct identity of the Volvo brand.”

Having been scared last year by the near collapse of Saab, Sweden has acquiesced to the sale of Volvo to the Chinese buyer.

“The future road for Volvo Cars is now defined,” said Maud Olofsson, the Swedish deputy prime minister and minister for enterprise and energy. “Regardless of who owns Volvo Cars, its brand will still be Swedish.”

Photo

“The future road for Volvo Cars is now defined,” Maud Olofsson, the Swedish deputy prime minister, said on Sunday. “Regardless of who owns Volvo Cars, its brand will still be Swedish.” Credit
Bjorn Larsson Rosvall/Scanpix Sweden, via Reuters

The deal is scheduled to close in the third quarter of this year. In the 11 years that Ford has owned Volvo Cars, it has closely integrated the two companies’ designs, so that their cars now share many parts.

Lewis W. K. Booth, Ford’s chief financial officer, said Ford would continue to supply Geely with engines, stamped steel body parts and other components for a period of time that he did not specify.

Yale Zhang, the director of greater China vehicle forecasts for CSM Worldwide, an international consulting firm, said the acquisition would benefit Geely Auto’s image at home, because many Chinese were likely to take pride in the acquisition of such a famous brand by a Chinese company. But Zhejiang Geely may also face a difficult time in becoming a multinational concern, since it has focused mostly on its domestic market up to now.

“It will help Geely’s brand, that’s for sure,” Mr. Zhang said.“The challenges and the risks are equal to the opportunity.”

Zhejiang Geely owns 51 percent of Geely Automobile Holdings, which is publicly traded in Hong Kong. Zhejiang Geely also still owns the original motorcycle parts manufacturing operation, along with several technical institutes and a hotel complex in southern China.

In a letter to the Hong Kong stock exchange last summer, Geely Auto publicly assured its minority investors that it would not try to buy Volvo. Such a deal would have greatly increased its debt at a time when the automaker was already investing heavily to expand in the Chinese market.

Instead of making a bid for Volvo through Geely Auto, the privately held parent company made the deal. With its pledge to keep Geely Auto and Volvo as separate subsidiaries, Zhejiang Geely may have been trying to address possible concerns in Sweden about the sale of a national icon to a Chinese company.

Mr. Dunne predicted that the Chinese market for luxury cars would more than double in the coming years, to 650,000 in 2015, compared with 300,000 last year.

“There is room in China for a successful Volvo,” Mr. Dunne said. “But will Geely know how to make it go?”

Nick Bunkley contributed reporting from Detroit.

A version of this article appears in print on March 29, 2010, on Page B1 of the New York edition with the headline: Ford Agrees to Sell Volvo to a Fast-Rising Chinese Company. Order Reprints|Today's Paper|Subscribe